Authors: Song Zhang Han Qing Jin Xun Yu Zhou
Publish Date: 2011/01/15
Volume: 27, Issue: 2, Pages: 255-274
Abstract
In this paper we formulate a continuoustime behavioral à la cumulative prospect theory portfolio selection model where the losses are constrained by a prespecified upper bound Economically the model is motivated by the previously proved fact that the losses occurring in a bad state of the world can be catastrophic for an unconstrained model Mathematically solving the model boils down to solving a concave Choquet minimization problem with an additional upper bound We derive the optimal solution explicitly for such a loss control model The optimal terminal wealth profile is in general characterized by three pieces the agent has gains in the good states of the world gets a moderate endogenously constant loss in the intermediate states and suffers the maximal loss which is the given bound for losses in the bad states Examples are given to illustrate the general resultsThe first author is partially supported by National Fundamental Research Program of China 973 Program Grant No 2007CB814905 and a visiting scholarship from the China Scholarship Council the third author owes thanks for aid to a startup fund of the University of Oxford
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